Federal Contract Law: Contractors even sue themselves over contracts

Recently, two contracting Goliaths squared off in the courtroom. Lockheed Martin Corp. sued Boeing Co. over an Air Force contract for rockets to launch satellites.

Although Lockheed Martin won a contract for nine rockets, Boeing fared better, with a contract for 19. But that wasn't the end. The U.S. attorney in Los Angeles investigated whether Boeing had secret information about Lockheed's bid. Ultimately, two former Boeing employees were indicted.

After Lockheed filed suit, Boeing ran a full-page ad in major newspapers that admitted improprieties by some employees but stressed that the company didn't condone such conduct. At this point, the only remaining question is about what remedy Lockheed will get.

Sometimes, but not often, a disappointed bidder will sue the successful one, instead of (or in addition to) protesting the award. A little-known line of cases that started in Iowa more than 20 years ago permit the wronged bidder to sue the successful one, if the contract was won through fraud or results in 'unjust enrichment.'

The Iowa ruling concerned a construction contract set-aside for small businesses. The low bidder erroneously certified that it was a small business. The second-low bidder sued, claiming that it should have won the contract.

The courts agreed even though there was no proof of actual fraud. The plaintiff succeeded under a different legal theory'unjust enrichment'resulting from the improper size certification. The court required the contract winner to make restitution to the other by paying over its profits as damages.

The novel aspect of this case is that the court used federal law'the Small Business Act and other regulations'as the legal standard for a common-law action. Other courts generally have followed this ruling, but there are few decided cases. It can be hard to prove that the wrongful action caused the loss of the contract because most award decisions involve more than simply finding the next-lowest bidder.

Sometimes a contract award leads to a suit, not by a disappointed bidder, but by a jilted subcontractor. Even a teaming agreement may not be enough to protect the would-be sub. Not too long ago, a Virginia court decision reminded us that, to be enforceable, the contract terms had to be definite, and not merely an agreement to agree.

A prospective subcontractor is in better shape, though, when the prime contractor's proposal features it. In one case in which I served as an expert witness, the prime had lost a bid protest because of a bait-and-switch tactic. In other words, to win the contract it proposed the sub, then dumped it after the award. The prime kept the contract, however, and the wronged subcontractor won damages in state court.

Perhaps the strangest dispute between contractors is the infamous 'Pit 9' controversy. What made this case unusual was that both parties were subsidiaries of the same corporation: Lockheed Martin. One subsidiary, operating a facility for the Energy Department as prime contractor, terminated the subcontract of another subsidiary for default. The terminated company tried to sue the government, but the courts would have none of it.

As odd as it was, this was simply another prime-sub dispute, even though both parties were members of the same corporate family. Arguments between siblings can be the worst kind.

Joseph J. Petrillo is a lawyer with the Washington law firm of Petrillo & Powell. E-mail him at jp@petrillopowell.com.